Dear readers/followers,
AMSC ASA (OTCQX:ASCJF) is a company I’ve been reviewing a few times now, each time going to a “Hold” rating. The results speak for themselves – that rating has outperformed ever since the first article I wrote, before the company dropped significantly, and where my first article also at a “Hold” has seen an overall rate of return of as low as negative 30%. Since my last article, which you can find here, the RoR looks like this, even with dividends included.
Seeking Alpha ASMC Article (Seeking Alpha ASMC Article)
Not an especially interesting or impressive RoR – just as the company during the same time. The reason for this is quite obvious. Ship financing and shipping is a field I’ve gone into before and bloodied my nose. Ocean Yield was, in fact, one such investment, and I exited that with a negative, albeit not as big a one as it could have been. It means that I’m much more careful these days because I understand more of the business than I did before.
AMSC ASA seemed like an interesting play, at least potentially. The Protection of the Jones Act, a geographically favorable play that included this business, seemed set to deliver alpha at the right valuation for this company – until it abandoned it. It’s a thing I covered more comprehensively in my last article.
With the dividend cut, the company changed, and everything is sort of unclear, what remains of whatever upside we have here?
Let’s find out.
AMSC ASA – The company’s appeal is there, but we should look for a better valuation before entering.
A 16%+ drop, 13%+ with dividends included, is not small. There is a reason for it, and this company is far from “worthless”. We just need to keep things in mind for when we invest here. 2Q24 came out in mid-July, so about two months ago. A few items are worth mentioning here.
The company participated in a private placement with Solstad Maritime, which resulted in a share of the 248.9M of profit related to an investment. The company’s quarterly dividend amounted to 0.55 NOK, which came in line with the company’s previous expectation.
Much of the capital that the company had been getting from leaving its segment has been invested at this point, and the recent investment was that stake in Solstad Maritime, now up to 19.4% fully diluted. This has turned the company from a ship financing business to more of an offshore energy holding company and ship financing/investment business. The questions here are many. While I don’t argue that the outlook for the E&P segment and offshore segment remains strong, I fail to see why I should invest in AMSC ASA to get exposure to this. There are, as I would see it, far more favorable and conservative ways to get such exposure.
Also, the company refers to more investment and activity in offshore wind – a segment I remain particularly risk-averse towards. The company doesn’t even speak of investing in vessels anymore, rather focuses on “investment opportunities and effective capital allocation alternatives with the aim to continue to make attractive quarterly distributions.”
That, to me, sounds more like a pure-play investment company.
AMSC ASA also went ahead and purchased investment-grade bank bonds in order to improve its yield on cash holdings – around $13.6M of them. There is absolutely nothing wrong with getting yield on cash – but typically companies don’t feel the need to advertise with this as the third point of a “main event” during a quarter. This is especially true for a company that up until very recently made its cash flow from shipping.
This oddity, if we call it that, is further confirmed and cemented by the fact that AMSC ASA manages a negative/operating loss from continuing operations, increasing that loss from 10 MNOK to over 12MNOK in 2Q24.
The company now owns roughly a fifth of Solstad Maritime, a company that generates upwards of 700 MNOK of net cash from operations, which would entitle AMSC to 140 MNOK of that amount.
This is how you should view AMSC going forward. Through the investment in Solstad Maritime, ASMC continues to work in the sector, and a fleet of CSVs, or Construction service vessels, as well as other maritime assets catering to the oil and gas industry. The one argument, and what speaks in favor of this company here is that Solstad Maritime is a privately listed company. By investing in ASMC ASA, you’re investing in a company, or 20% of it, that you could not get exposure to otherwise. And let’s say that AMSC ASA was to grow to encompass other, attractive investments as well – well, you could see an upside from that.
But all previous targets for this company really make very little sense here.
The question you should ask yourself is this: Do I want to own an oil & gas shipping portfolio investor of this size, with the ambition to further invest in a volatile offshore energy market?
For myself, the answer is surprisingly yes, but only at the right price.
Two ways to view and handle this investment., and I work using investment multiples for where the company is actually at. Revenue and sales multiples are no longer as interesting – instead, what’s taken up a foremost place among my KPIs is things like book value and tangible book value, as well as an overall dividend yield. The targets for this company have dropped like a stone. Since my first article, this company has gone from a 50 NOK PT to less than a 23 NOK PT – but that makes sense given that the company sold most of what made it AMSC ASA in the first place.
It should also be clear to you that the company’s investments, especially in offshore, and especially in comparatively smaller businesses, can and probably will be subject to dilution.
I say that because even only since my last article, when the company had 21.1% of Solstad Maritime, and despite increasing exposure here, the company’s stake is down almost 200 bps. It’s not unfair to expect this trend to continue unless the company puts more cash on the table.
In my last article, I said that the company has very little concrete as to what it’s going to do. That’s no longer the case – it’s told us what it intends to do. The issue is that I don’t find their strategy all that compelling. A 6%+ yield isn’t that compelling with this risk profile. Frankly, looking at the remainder of the market, this is actually a low “high yield”, as far as yields go. For that reason, I would want to see clear upsides before I put cash down here.
Let’s look at the valuation and compare it to my last piece.
AMSC ASA – No longer close to a “Sell” at least
In my last article, I made a point of the company being close to a “Sell” recommendation. After a 16% drop, that’s no longer the case. The company has also provided at least some clarity with regard to its plan, which is another positive. Getting more insight into the company is harder, though because the company doesn’t hold earnings calls – so deciphering company ambitions and plans here becomes more of a guesswork than I would like. That’s also the reason why I find myself not raising the PT here, despite the two positives from this recent quarter.
What I like about AMSC ASA is that the company’s move into offshore investments brings an end to the questions some had about the future of the Jones financing of the company’s portfolio. What I don’t like about the company is that this makes it no different than some investment and financing companies, in fact, not that much different than a bank – and even much less appealing given the risk profile we see here.
My last price target for this company came to 15 NOK – around a 30-35% discount to the P/B. I continue to believe that this is justified given the risk profile I’m seeing for this company. This would signify around a 60-70%, or 0.6-0.7x P/B, which is a suitable discount given that it’s where I mostly put riskier investment companies.
The company still, in my view, has to prove itself, however. Given its long-term negative RoR, I would say that AMSC shouldn’t be invested in until it can show that it can provide value and/or profit. At the very least, I’m looking for the company not to dilute further, as it currently is as of 2Q24 (speaking to its Solstad investment).
AMSC is the ticker I would invest in – the native Norwegian one. The ADR ASCJF is both thinly traded and hard to forecast and/or work with. This company is one with a market capitalization of below $200M. All of these factors make it so that I can’t in good conscience continue to give this anything but a “Hold” – but it has at least deserved, due to lower valuation, of no longer being close to a “Sell”.
Also, I wouldn’t say that this company is in any sort of threat of immediate bankruptcy – another positive.
As of 2Q24, I would say that my thesis is as follows. I will keep following ASMC, but I likely won’t cover it until we see something significant on the upside from here on out (or a significant downside).
Thesis
- AMSC is a recently transformed company, once a play on the conservative US-based Jones Act, now your standard shipping leasing company with a fleet of potentially attractive vessels with a hopeful upside generating a dividend yield of about 6.5%.
- For that reason, I’m careful here. I wouldn’t buy the company at today’s valuation but would wait, if interested, for a bit of a drop.
- My PT for the company now comes to 15 NOK/share, which is where I move my 2H24E coverage here.
- The likelihood of the company dropping to this level without macro impacts is potentially low – but this signifies just what I’m looking for before I would be willing to “BUY” a spec stock like this here. Especially one that as of 4Q23 has materially changed its risk/reward factor, and not for the better, as I currently see it, with no change in forward clarity from the company that I can see either as of the AGM or the annual report.
Here are my criteria and how the company fulfills them (italicized).
- This company is overall qualitative.
- This company is fundamentally safe/conservative & well-run.
- This company pays a well-covered dividend.
- This company is currently cheap.
- This company has a realistic upside based on earnings growth or multiple expansion/reversion.
The company fulfills 1 out of my 5 criteria, making it a “Hold” here. It’s a small upgrade from my last piece, as I am removing the “Sell” potential from the equation here.
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